4 major concerns over Oxley’s game plan

I attended Oxley Holdings’ 2QFY2018 results briefing last Friday and left the meeting with four concerns regarding the Singapore developer’s strategic directions.1st Concern: New projects have to be launched ASAP

Oxley’s quarterly results ending 31 December 2017 was filed with SGX on Thursday evening. Below is the summary of the developer’s financial performance comparing with the previous year (2QFY2017) by Business Times:

– Revenue tumbled 33 percent to S$406.1 million- Net profit fell 45 percent to S$68 million- Earnings per share dropped 42 percent to 2.1 Singapore cents

The unimpressive performance is the result of no major revenue contributor in 2QFY2018 apart from the UK project Royal Wharf. In contrast, revenue of 2QFY2017 was boosted by the completion of Oxley Tower in December 2016. No major launch is also the reason for the company’s continuous weak financial performance in the last two quarters.

As I mentioned earlier in my blog post “Are Singapore developers forced to walk a tightrope?”, successful launch of new projects can do wonders to developers’ quarterly numbers.

For Oxley, timely launch of new development is critical to show a good report card for the next two quarters.

Executive Chairman and CEO Ching Chiat Kwong confirmed at the briefing that Oxley will start launching projects in smaller plots of freehold land that they acquired earlier, including 494 Upper East Coast, 208YCK in Yio Chu Kang and Apartment 8 in Potong Pasir.

This has to be done by this March to make it in time to reflect in 3QFY2018 results. The launch of bigger sites in their land bank will commence in August.

From a cash flow perspective, the 20 percent deposit from buyers can be deployed to settle the schedule of down payment to en bloc owners of Vista Park.

Oxley is really competing against time to launch 9 residential projects in 2 to 7 months’ time.

The developer emphasized that efficiency is always the culture of Oxley. They are going to shorten the time to launch by skipping studies of traffic impact and design types.

According to Oxley, compared with Chinese developers which need time to do planning and building the team, they have the competitive advantage to buy land earlier at a lower price and launch the project first. Other developers are buying later at higher prices and can only launch after them and at higher prices.2nd Concern: Ten acquisitions in eight months – courageous or outrageous?

As a nice gesture to welcome advertising dollars from Oxley, early this week the same article with the headline “Oxley, China developer lead Singapore land bank race – for now” appeared in both The Straits Times and Business Times.

The SPH papers revealed that Oxley now holds the largest residential land bank in Singapore with the potential of building 2,338 residential units (Oxley claimed to be building 3,800).

Oxley has been aggressively building up its land bank since May 2017. It didn’t miss any opportunity – be it government land sales, en bloc sales, private sales or joint venture. The developer is also known for its speedy and generous offers.

For the past few years, Oxley has been adopting an asset light strategy in many overseas projects. Instead of buying the site, it structured deals with authorities or local landowners that allowed Oxley to commit lower capital and enjoy stronger cash flow from the project.

But there seems to be a change of strategy recently in the local property market.

For a short 8-month period between May and December last year, the developer has snapped up a total of 10 sites. The 9 residential sites have an estimated GDV (Gross Development Value) of $4.8 billion in which Oxley has a stake of S$3 billion.

According to URA, developers sold a total of 10,682 private residential units in 2017. Assuming an optimistic prediction of 10 to 30 percent increase in sales volume in 2018, to clear 3,800 units means 27 to 32 percent of total new sales in 2018 must be from Oxley projects. This is no doubt a very ambitious plan.3rd Concern: Is homecoming a strategic move or a risky bet?

Since the Singapore government imposed the last round of cooling measures in mid-2013, Oxley has been missing in action in the local property scene. Their last move was the acquisition of 28 Stevens Road in July 2013 to build a hotel project under the brands of Novotel and Mercure.

For the past 4 years, Oxley ventured outside Singapore to expand into UK, Dublin, Cyprus, Australia, Japan, Cambodia, Indonesia and Malaysia.

The site of London Royal Wharf was purchased at $397 million in November 2013 and launched in phases before Brexit. It remains a key revenue contributor for Oxley.

Another profitable future project is Gaobeidian in Xiongan Economic Area where Oxley has the largest share of 27.5 percent in the project. The Singapore consortium paid a land cost of RMB750 psm. After the announcement of the special economic district, property prices in the area have soared to RMB17,000 psm overnight.

The CEO kept emphasizing that their overseas projects are selling well. Below is the sales performance of Oxley’s overseas projects launched in the past two years:

The CEO lamented that it was not so easy to do business overseas. For these few years, they faced a lot of hardships overseas, including difficulties to build trust, secure loans, receive buyer payment only after project completion, etc.

They began to miss home and the more friendly Singapore market.

When they returned home mid-2017, Oxley immediately leapfrogged from hibernation state to hyperactive mode, bagging 10 sites in 8 months’ time.

Since entering the property market in 2008, Oxley is known for making the best of timing and acquiring land sites at good value.

They also ventured into foreign markets well before fellow developers. They have built their reputation even before these places become hot markets.

Although prices are now picking up in UK, Cambodia and China’s Xiongan, Oxley chose to put the focus back in Singapore – when land bidding is most competitive and developer margins are at historical-low.

For years to come, Oxley will rely on recurring income from successful overseas projects and profitable local and foreign hotels to fund low-margin residential projects in Singapore.

With a soft rental market, oversupply and low population growth, is it too risky to put all the eggs in one Singapore residential property market? How likely for Singapore to achieve 7 to 8 percent or even double-digit growth for the market this year?

I don’t know. Go ask Morgan Stanley.4th Concern: Is Oxley over-leveraged in the cash flow game?

The financial report shows a balance sheet of $4.75 billion total assets and S$ 3.53 billion total liabilities, excluding new bank loans from newly acquired sites which is estimated to be an additional S$400 million to S$500 million.

Borrowing is always a double-edge sword. As Mr Ching said at the briefing, “We’d better take the money when the banks are willing to lend, because we don’t know when the banks will ask us to pay it back.”

Oxley is giving shareholders the impression that it is borrowing more and more to acquire new sites and to sustain its aggressive growth in revenue. The strategy works in a new and fast-growing market. But in this mature and competitive market, shareholders might want to see Oxley lower its debts and show a balance sheet with healthy cash flow.

There is around S$2.55 billion total debts in the books now, including EMTNs (Euro Medium Term Note), retail bonds, corporate borrowings and project debt, with most debts (S$1.86 billion) maturing in the year 2020 and 2021.

Even with recurring revenue from overseas projects, the ability of Oxley to repay the debts depends very much on the sales or rental performance of its 10 new Singapore projects in the next two years.

Of course, refinancing with local banks or issuing of more debts can be an alternative. But what if the Singapore market is hit by a crisis or recession? The developer might put itself in a precarious position.

While big developers with longer history have all been through the economic ups and downs, it will be interesting to see how Oxley can prove to be equally resilient during bad times.

Imagine a performer entertaining an audience with the ball juggling act, tossing 10 balls while catching one ball at a time with each hand. Timing is the key to prevent any accident and keep the balls in the air.

To put up an applaudable performance in front of the shareholders, Oxley must be able to grasp the precise timing every time to avoid dropping any ball. Mind you, these are highly-fragile crystal balls and is definitely not for the faint-hearted.

At least it’s better playing with balls than playing with fire.